IRS: Forfeitures can fund QNECs and QMACs
On January 18, 2017, the Internal Revenue Service ("IRS") issued proposed regulations that amend the definitions of qualified matching contributions ("QMACs") and qualified nonelective contributions ("QNECs") so that they can be funded with plan forfeitures.
QNECs and QMACs are employer contributions that may be made to non-highly compensated participants in a 401(k) plan to correct ADP/ACP (nondiscrimination) testing failures. To avoid having to apply the ADP test altogether, some employers choose to design their plans to satisfy an ADP safe harbor by providing a certain level of QMACs or QNECs to nonhighly compensated 401(k) plan participants. Prior to issuance of the proposed regulations, QMACs and QNECs were defined as matching and employer contributions that satisfied applicable nonforfeitability and distribution requirements at the time of contribution to the plan. The result of these requirements was that forfeitures could not be used to fund QNECs and QMACs.
The New Rule
The proposed regulations provide that employer contributions can qualify as QNECs or QMACs if they satisfy the nonforeitability and distribution requirements at the time of allocation to participants' accounts. Now forfeitures can be used to fund safe harbor or corrective QNECs and QMACs.
Effective Date of the New Rule
The IRS specified that the proposed regulations may be relied upon for taxable years beginning on or after the date of the proposed regulations' publication. The IRS added that if final regulations are more restrictive than the proposed regulations, then they would apply only prospectively.
What Plan Sponsors Need to Know
For plan sponsors that have adopted prototype or volume submitter plans, the document provider will undoubtedly be issuing elective "good faith" amendments in the near future to remove any restrictive plan language and permit the new forfeiture uses. Sponsors of individually designed 401(k) plans will want to consult with their plan document services provider.